Chapter 4
Systems Design: Process Costing
Solutions to Questions
4-1
A process costing system should be
used in situations where a homogeneous product is produced on a continuous basis.
4-2
1. Job-order costing and process costing have
the same basic purposes—to assign materials, labor, and overhead cost to products
and to provide a mechanism for computing
unit product costs.
2. Both systems use the same basic manufacturing accounts.
3. Costs flow through the accounts in basically
the same way in both systems.
4-3
Costs are accumulated by department in
a process costing system.
4-4
In a process costing system, the activity
performed in a department must be performed
uniformly on all units moving through it and the
output of the department must be homogeneous.
4-5
Cost accumulation is simpler under process costing because costs only need to be assigned to departments—not separate jobs. A
company usually has a small number of processing departments, whereas a job-order costing system often must keep track of the costs of
hundreds or even thousands of jobs.
4-6
In a process costing system, a Work in
Process account is maintained for each separate
processing department.
4-7
4-8
The costs that might be added in the
Firing Department include: (1) costs transferred
in from the Mixing Department; (2) materials
costs added in the Firing Department; (3) labor
costs added in the Firing Department; and (4)
overhead costs added in the Firing Department.
4-9
Under the weighted-average method,
equivalent units of production consist of units
transferred to the next department (or to finished goods) during the period plus the equivalent units in the department’s ending work in
process inventory.
4-10 A quantity schedule summarizes the
physical flow of units through a department during a period. It serves several purposes. First, it
provides information about activity in the department and also shows the stage of completion of any in-process units. Second, it provides
data for computing the equivalent units and for
preparing the other parts of the production report.
4-11 In process costing a unit of product accumulates cost in each department that it passes through, with the costs of one department
added to the costs of the preceding department
in a snowballing fashion.
4-12 The company will want to distinguish
between the costs of the metals used to make
the medallions, but the medals are otherwise
identical and go through the same production
processes. Thus, operation costing is ideally
suited for the company’s needs.
The journal entry would be:
Work in Process, Firing ......................................
4-13 Any company that manufactures prodXXXX
ucts that have some common characteristics and
Work in Process, Mixing ..............................
XXXX
some individual characteristics may want to use
operation costing. Examples include textiles,
shoes, electronic parts, and clothing.
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4-14 Under the FIFO method, units transferred out are divided into two parts. One part
consists of the units in the beginning inventory.
Only the work needed to complete these units is
shown as part of the equivalent units for the
current period. The other part of the units transferred out consists of the units started and completed during the current period; these units are
shown as a separate amount in the equivalent
units computation under the FIFO method.
4-15 Under the FIFO method, units transferred out are divided into two groups. The first
group consists of units from the beginning work
in process inventory. The second group consists
of units started and completed during the period.
4-16 The FIFO method is superior to the
weighted-average method for cost control because current performance should be measured
in relation to costs of the current period only,
and the weighted-average method mixes these
costs in with costs of the prior period. Thus, under the weighted-average method, the department’s apparent performance in the current period is influenced to some extent by what happened in a prior period.
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147
Exercise 4-1 (20 minutes)
a. To record issuing raw materials for use in production:
Work in Process—Molding Department .........
23,000
Work in Process—Firing Department.............
8,000
Raw Materials .......................................
31,000
b. To record direct labor costs incurred:
Work in Process—Molding Department .........
Work in Process—Firing Department.............
Wages Payable .....................................
12,000
7,000
19,000
c. To record applying manufacturing overhead:
Work in Process—Molding Department .........
Work in Process—Firing Department.............
Manufacturing Overhead .......................
25,000
37,000
62,000
d. To record transfer of unfired, molded bricks from the Molding Department to the Firing Department:
Work in Process—Firing Department.............
57,000
Work in Process—Molding Department ...
57,000
e. To record transfer of finished bricks from the Firing Department to the
finished bricks warehouse:
Finished Goods............................................
103,000
Work in Process—Firing Department ......
103,000
f. To record Cost of Goods Sold:
Cost of Goods Sold ......................................
Finished Goods .....................................
101,000
101,000
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Exercise 4-2 (10 minutes)
Weighted-Average Method
Equivalent Units (EU)
Materials Conversion
Units transferred out ......................................................
190,000
190,000
Work in process, ending:
15,000 units × 80% ....................................................
12,000
15,000 units × 40% ....................................................
6,000
Equivalent units .............................................................
202,000
196,000
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149
Exercise 4-3 (15 minutes)
Weighted-Average Method
Materials
Labor
Work in process, May 1 ..................................................
$ 18,000 $ 5,500
Cost added during May ...................................................
238,900
80,300
Total cost (a) .................................................................
$256,900 $85,800
Equivalent units of production (b) ...................................
35,000
33,000
Cost per equivalent unit (a) ÷ (b) ...................................
$7.34
$2.60
Overhead
$ 27,500
401,500
$429,000
33,000
$13.00
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Exercise 4-4 (10 minutes)
Weighted-Average Method
Ending work in process inventory:
Equivalent units of production .................
Cost per equivalent unit ..........................
Cost of ending work in process inventory .
Units completed and transferred out:
Units transferred to the next department .
Cost per equivalent unit ..........................
Cost of units completed and transferred
out ....................................................
Materials Conversion
Total
300
$31.56
$9,468
100
$9.32
$932 $10,400
1,300
$31.56
1,300
$9.32
$41,028
$12,116 $53,144
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Solutions Manual, Chapter 4
151
Exercise 4-5 (10 minutes)
FIFO Method
To complete beginning work in process:
Materials: 400 units x (100% – 75%) .................
Conversion: 400 units x (100% – 25%) ..............
Units started and completed during the period
(42,600 units started – 500 units in ending inventory) ............................................................
Ending work in process
Materials: 500 units x 80% complete ..................
Conversion: 500 units x 30% complete ...............
Equivalent units of production ................................
Materials Conversion
100
42,100
400
42,600
300
42,100
150
42,550
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Managerial Accounting, 12th Edition
Exercise 4-6 (10 minutes)
FIFO Method
Materials
Labor
Overhead
Cost added during May (a)..............................................
$193,320 $62,000 $310,000
Equivalent units of production (b) ...................................
27,000 25,000
25,000
Cost per equivalent unit (a) ÷ (b)....................................
$7.16
$2.48
$12.40
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153
Exercise 4-7 (15 minutes)
FIFO Method
Ending work in process inventory:
Materials Conversion
Equivalent units of production ...............
Cost per equivalent unit ........................
Cost of ending work in process inventory
Total
800
$4.40
$3,520
200
$1.30
$260
$3,780
$2,700
$380
$3,080
400
$4.40
700
$1.30
$1,760
$910
7,000
$4.40
7,000
$1.30
Units transferred out:
Cost in beginning work in process inventory .................................................
Cost to complete the units in beginning
work in process inventory:
Equivalent units of production required
to complete the beginning inventory
Cost per equivalent unit ......................
Cost to complete the units in beginning
inventory .......................................
Cost of units started and completed this period:
Units started and completed this period
(8,000 units completed and transferred to the next department –
1,000 units in beginning work in
process inventory) ..........................
Cost per equivalent unit ......................
Cost of units started and completed
this period .....................................
Total cost of units transferred out ..........
$30,800
$2,670
$9,100 $39,900
$45,650
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Managerial Accounting, 12th Edition
Exercise 4-8 (15 minutes)
Service Departments
AdminiFacility
stration
Services
Departmental costs before
allocations ....................... $2,400,000 $1,600,000
Allocations:
Administration costs
(20/25, 5/25) .............. (2,400,000)
Facility Services costs
(70/100, 30/100)* .......
(1,600,000)
Total costs after allocation.. $
0 $
0
Operating Departments
Undergraduate
Graduate
Programs
Programs
$26,800,000
$5,700,000
1,920,000
480,000
1,120,000
$29,840,000
480,000
$6,660,000
Total
$36,500,000
$36,500,000
*Based on the space occupied by the two operating departments, which is 100,000 square feet.
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155
Exercise 4-9 (15 minutes)
Service
Departments
Administration Janitorial
Departmental costs before allocations ..... $150,000 $40,000
Allocations:
Administration costs
(160/4,000, 3,100/4,000,
740/4,000)* .................................... (150,000)
6,000
Janitorial costs
(4,000/5,000, 1,000/5,000)† ............
(46,000)
Total costs after allocation...................... $
0 $
0
Operating
Departments
Groceries
Gifts
$2,320,000 $950,000
116,250
Total
$3,460,000
27,750
36,800
9,200
$2,473,050 $986,950
$3,460,000
*Based on employee hours in the other three departments, 160 + 3,100 + 740 = 4,000.
†Based on space occupied by the two operating departments, 4,000 + 1,000 = 5,000.
Both the Janitorial Department costs of $40,000 and the Administration costs of $6,000 that have been
allocated to the Janitorial Department are allocated to the two operating departments.
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Exercise 4-10 (10 minutes)
Work in Process—Cooking ..............................................
42,000
Raw Materials Inventory ...........................................
42,000
Work in Process—Cooking ..............................................
50,000
Work in Process—Molding ..............................................
36,000
Wages Payable .........................................................
86,000
Work in Process—Cooking ..............................................
75,000
Work in Process—Molding ..............................................
45,000
Manufacturing Overhead ...........................................
120,000
Work in Process—Molding ..............................................
160,000
Work in Process—Cooking .........................................
160,000
Finished Goods ..............................................................
240,000
Work in Process—Molding .........................................
240,000
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157
Exercise 4-11 (20 minutes)
Weighted-Average Method
1.
2.
Units transferred to the next department ........................................
Ending work in process:
Materials: 8,000 units × 75%
complete......................................
Labor: 8,000 units × 50% complete ............................................
Overhead: 8,000 units × 50%
complete......................................
Equivalent units of production ............
Materials
42,000
Labor
42,000
Overhead
42,000
6,000
4,000
48,000
Materials
46,000
Labor
Cost of beginning work in process ....... $ 4,320 $ 1,040
Costs added during the period ............
52,800
21,500
Total cost (a) ..................................... $ 57,120 $ 22,540
Equivalent units of production (b) .......
48,000
46,000
Cost per equivalent unit (a) ÷ (b)........
$1.19
$0.49
4,000
46,000
Overhead
$ 1,790
32,250
$ 34,040
46,000
$0.74
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Managerial Accounting, 12th Edition
Exercise 4-12 (20 minutes)
FIFO Method
1.
To complete beginning work in process:
Materials: 5,000 gallons ×
(100% − 80%) ................................
Labor: 5,000 gallons ×
(100% − 60%) ................................
Overhead: 5,000 gallons ×
(100% − 60%) ................................
Units started and completed during the
period* ...............................................
Ending work in process:
Materials: 8,000 gallons × 75% ...........
Labor: 8,000 gallons × 50% ................
Overhead: 8,000 gallons × 50% ..........
Equivalent units of production ................
Materials
Labor
Overhead
1,000
2,000
2,000
37,000
6,000
44,000
37,000
4,000
43,000
37,000
4,000
43,000
* 45,000 units started into production – 8,000 units in ending work in process = 37,000 started and completed
2.
Cost added during the period (a) ............
Equivalent units of production (b) ...........
Cost per equivalent unit (a) ÷ (b) ......... `
Materials Labor Overhead
$52,800 $21,500
44,000 43,000
$1.20
$0.50
$32,250
43,000
$0.75
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159
Exercise 4-13 (45 minutes)
FIFO Method
1. Computation of the total cost per equivalent unit of production:
Cost per equivalent unit of
production for material.................................................
$25.40
Cost per equivalent unit of
production for conversion .............................................
18.20
Total cost per equivalent unit
of production ...............................................................
$43.60
2. Computation of equivalent units in ending inventory:
Materials
Conversion
Units in ending inventory ................................................
300
300
Percentage completed ....................................................
70 %
60 %
Equivalent units of production .........................................
210
180
3. Computation of equivalent units required to complete the beginning inventory:
Materials
Conversion
Units in beginning inventory............................................
400
400
Percentage uncompleted ................................................
20 %
60 %
Equivalent units of production .........................................
80
240
4. Units transferred to the next department .........................
3,100
Units from the beginning inventory..................................
400
Units started and completed during the period .................
2,700
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Managerial Accounting, 12th Edition
Exercise 4-13 (continued)
5.
Ending work in process inventory:
Equivalent units of production ...................................................
Cost per equivalent unit ............................................................
Cost of ending work in process inventory ...................................
Materials Conversion
210
$25.40
$5,334
Units transferred out:
Cost from the beginning work in process inventory.....................
$5,321
Cost to complete the units in beginning work in process inventory:
Equivalent units of production required to complete the units
in beginning inventory.......................................................
80
Cost per equivalent unit .......................................................
$25.40
Cost to complete the units in beginning inventory ..................
$2,032
Cost of units started and completed this period:
Units started and completed this period.................................
2,700
Cost per equivalent unit .......................................................
$25.40
Cost of units started and completed this period...................... $68,580
Total cost of units transferred out .............................................
Total
180
$18.20
$3,276
$8,610
$5,809
$11,040
240
$18.20
$4,368
$6,400
2,700
$18.20
$49,140 $117,720
$135,160
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161
Exercise 4-14 (15 minutes)
Weighted-Average Method
Materials Conversion
Pounds transferred to the next department during
July* .................................................................. 375,000
Work in process, July 31:
Materials: 25,000 pounds × 100% complete ......... 25,000
Conversion: 25,000 pounds × 60% complete ........
Equivalent units of production ................................ 400,000
375,000
15,000
390,000
* 20,000 + 380,000 – 25,000 = 375,000
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Managerial Accounting, 12th Edition
Exercise 4-15 (15 minutes)
FIFO Method
Conversion
Materials
Costs
To complete the beginning work in process:
Materials: 20,000 pounds × (100% − 100%)........
0
Conversion costs:
20,000 pounds × (100% − 30%) ......................
Started and completed during May (380,000
pounds started − 25,000 pounds in ending inventory) ............................................................. 355,000
Ending work in process:
Materials: 25,000 pounds × 100% complete ......... 25,000
Conversion costs: 25,000 pounds × 60% complete ................................................................
Equivalent units of production ................................ 380,000
14,000
355,000
15,000
384,000
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163
Exercise 4-16 (20 minutes)
Service
Departments
Administration
Janitorial
Operating
Departments
Maintenance
Binding
Printing
Total
Overhead costs ................................... $140,000 $105,000 $ 48,000 $275,000 $430,000 $998,000
Allocations:
Administration costs:
(5%, 20%, 45%, 30%)* ................ (140,000)
7,000
28,000
63,000
42,000
Janitorial costs: (1/8, 2/8, 5/8) .........
(112,000) 14,000
28,000
70,000
Maintenance costs: (1/3, 2/3) ...........
(90,000)
30,000
60,000
Total overhead costs after allocations ... $
0 $
0 $
0 $396,000 $602,000 $998,000
* Allocations can be shown in percentages, in fractions, or as a rate per unit of activity. For example,
Administration allocations have been shown as percentages, but they could have been shown as 1/20;
4/20; 9/20; and 6/20 or they could have been shown as $200 per employee. Fractions should be used
if percentages result in rounding errors.
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Managerial Accounting, 12th Edition
Exercise 4-16 (continued)
Supporting computations:
Administration costs allocated on the basis of:
Janitorial ..................
35 employees
5%
Maintenance .............
140 employees
20
Binding ....................
315 employees
45
Printing ....................
210 employees
30
Total ........................
700 employees
100 %
Janitorial costs allocated on the basis of:
Maintenance .............
20,000 square feet
Binding ....................
40,000 square feet
Printing .................... 100,000 square feet
Total ........................ 160,000 square feet
1/8
2/8
5/8
8/8
Maintenance costs allocated on the basis of:
Binding ....................
30,000 hours
Printing ....................
60,000 hours
Total ........................
90,000 hours
1/3
2/3
3/3
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Solutions Manual, Chapter 4
Exercise 4-17 (20 minutes)
Service
Departments
Administration
Janitorial
Operating
Departments
Maintenance
Overhead costs ............................ $140,000 $105,000 $ 48,000
Allocation:
Administration costs: (3/5, 2/5).. (140,000)
Janitorial costs: (2/7, 5/7) ..........
(105,000)
Maintenance costs: (1/3, 2/3) ....
(48,000)
Total overhead costs after allocations ......................................... $
0 $
0 $
0
Binding
$275,000
84,000
30,000
16,000
$405,000
Printing
Total
$430,000 $998,000
56,000
75,000
32,000
$593,000 $998,000
Supporting computations:
Administration
Binding .. 315 employees 3/5
Printing .. 210 employees 2/5
Total ...... 525 employees 5/5
Janitorial
40,000 square feet 2/7
100,000 square feet 5/7
140,000 square feet 7/7
Maintenance
30,000 hours 1/3
60,000 hours 2/3
90,000 hours 3/3
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Exercise 4-18 (15 minutes)
Weighted-Average Method
1.
Units transferred to the next process ...............
Ending work in process:
Materials: 10,000 units × 100% complete .....
Conversion: 10,000 units × 30% complete ....
Equivalent units of production .........................
2.
Cost of beginning work in process ..................
Cost added during the period .........................
Total cost (a) ................................................
Equivalent units of production (b)...................
Cost per equivalent unit (a) ÷ (b) ...................
3.
Ending work in process inventory:
Equivalent units of production
(see above) ........................
Cost per equivalent unit (see
above) ...............................
Cost of ending work in process
inventory ............................
Materials Conversion
175,000
10,000
185,000
175,000
3,000
178,000
Materials Conversion
$ 1,500
$ 4,000
54,000
352,000
$55,500 $356,000
185,000
178,000
$0.30
$2.00
Materials Conversion
10,000
3,000
$0.30
$2.00
$3,000
$6,000
Total
$9,000
Units completed and transferred out:
Units transferred to the next
process ..............................
Cost per equivalent unit
(see above) ........................
Cost of units completed and
transferred out ...................
175,000
175,000
$0.30
$2.00
$52,500
$350,000
$402,500
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167
Problem 4-19 (45 minutes)
Weighted-Average Method
1. Equivalent Units of Production
Transferred to bottling .....................................
Ending work in process:
Materials: 40,000 units x 100% complete .......
Conversion: 40,000 units x 25% complete ......
Equivalent units of production ..........................
2. Cost per Equivalent Unit
160,000
40,000
200,000
160,000
10,000
170,000
Materials Conversion
Cost of beginning work in process ................
Cost added during the period .......................
Total cost (a) ..............................................
Equivalent units of production (b) ................
Cost per equivalent unit, (a) ÷ (b) ...............
3. Applying Costs to Units
Materials Conversion
$ 25,200
334,800
$360,000
200,000
$1.80
Materials Conversion
Ending work in process inventory:
Equivalent units of production
(materials: 40,000 units x
100% complete; conversion:
40,000 units x 25% complete)
40,000
Cost per equivalent unit .......
$1.80
Cost of ending work in process
inventory ...........................
$72,000
Units completed and transferred out:
Units transferred to the next
department .......................
160,000
Cost per equivalent unit .......
$1.80
Cost of units completed and
transferred out...................
$288,000
$ 24,800
238,700
$263,500
170,000
$1.55
Total
10,000
$1.55
$15,500
$87,500
160,000
$1.55
$248,000
$536,000
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Problem 4-19 (continued)
4. Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
($25,200 + $24,800) ..................................
Costs added to production during the period
($334,800 + $238,700) ..............................
Total cost to be accounted for .......................
Costs accounted for as follows:
Cost of ending work in process inventory ......
Cost of units completed and transferred out ..
Total cost accounted for ...............................
$ 50,000
573,500
$623,500
$ 87,500
536,000
$623,500
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169
Problem 4-20 (45 minutes)
FIFO method
1. Equivalent Units of Production
To complete beginning work in process:
Materials: 20,000 units x (100% − 100%) .....
Conversion: 20,000 units x (100% − 75%) ....
Units started and completed during the period
(180,000 units started − 40,000 units in ending inventory) ...............................................
Ending work in process:
Materials: 40,000 units x 100% complete ......
Conversion: 40,000 units x 25% complete .....
Equivalent units of production ...........................
2. Cost per Equivalent Unit
Cost added during the period (a) ..............
Equivalent units of production (b) .............
Cost per equivalent unit (a) ÷ (b) .............
Materials Conversion
0
140,000
40,000
180,000
5,000
140,000
10,000
155,000
Materials Conversion
$334,800
180,000
$1.86
$238,700
155,000
$1.54
3. See the next page.
4. Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory ...........
Costs added to production during the period
($334,800 + $238,700) ......................................
Total cost to be accounted for ................................
Costs accounted for as follows:
Cost of ending work in process inventory ................
Costs of units transferred out .................................
Total cost accounted for ........................................
$ 50,000
573,500
$623,500
$ 89,800
533,700
$623,500
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Problem 4-20 (continued)
3. Costs of Ending Work in Process Inventory and Units Transferred Out
Ending work in process inventory:
Equivalent units of production .................................................
Cost per equivalent unit ..........................................................
Cost of ending work in process inventory .................................
Materials Conversion
40,000
$1.86
$74,400
Units transferred out:
Cost in beginning work in process inventory ............................ $25,200
Cost to complete the units in beginning work in process inventory:
Equivalent units of production required to complete the beginning inventory ............................................................
0
Cost per equivalent unit .....................................................
$1.86
Cost to complete the units in beginning inventory ................
0
Cost of units started and completed this period:
Units started and completed this period .............................. 140,000
Cost per equivalent unit .....................................................
$1.86
Cost of units started and completed this period ................... $260,400
Cost of units transferred out ...................................................
Total
10,000
$1.54
$15,400
$89,800
$24,800
$50,000
5,000
$1.54
$7,700
$7,700
140,000
$1.54
$215,600 $476,000
$533,700
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Solutions Manual, Chapter 4
171
Problem 4-21 (45 minutes)
Weighted-Average Method
1. Equivalent Units of Production
Transferred to next department* ......................
Ending work in process:
Materials: 15,000 units x 60% complete .........
Labor: 15,000 units x 20% complete ..............
Overhead: 15,000 units × 20% complete ........
Equivalent units of production ..........................
Materials
95,000
9,000
104,000
Labor
95,000
3,000
98,000
Overhead
95,000
3,000
98,000
*Units in ending inventory = Units in beginning work in process + Units started into production −
Units completed and transferred out = 10,000 + 100,000 − 95,000 = 15,000
2. Cost per Equivalent Unit
Cost of beginning work in process ................
Cost added during the period .......................
Total cost (a) ..............................................
Equivalent units of production (b) ................
Cost per equivalent unit, (a) ÷ (b) ...............
Materials
$ 1,500
154,500
$156,000
104,000
$1.50
Labor
$ 1,800
22,700
$ 24,500
98,000
$0.25
Overhead
$ 5,400
68,100
$ 73,500
98,000
$0.75
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Managerial Accounting, 12th Edition
Problem 4-21 (continued)
3. Cost of Ending Work in Process Inventory and Units Transferred Out
Materials
Ending work in process inventory:
Equivalent units of production
(materials: 15,000 units x 60%
complete; labor and overhead:
15,000 units x 20% complete)
9,000
Cost per equivalent unit .......
$1.50
Cost of ending work in process
inventory ...........................
$13,500
Units completed and transferred out:
Units transferred to the next
department .......................
95,000
Cost per equivalent unit .......
$1.50
Cost of units completed and
transferred out...................
$142,250
Labor
Overhead
3,000
$0.25
3,000
$0.75
$750
$2,250
95,000
$0.25
95,000
$0.75
$23,750
$71,250
Total
$16,500
$237,500
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Solutions Manual, Chapter 4
173
Problem 4-21 (continued)
4. Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
($1,500 + $1,800 + $5,400).......................
Costs added to production during the period
($154,500 + $22,700 + $68,100) ...............
Total cost to be accounted for .......................
Costs accounted for as follows:
Cost of ending work in process inventory ......
Cost of units completed and transferred out ..
Total cost accounted for ...............................
$ 8,700
245,300
$254,000
$ 16,500
237,500
$254,000
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174
Managerial Accounting, 12th Edition
Problem 4-22 (45 minutes)
FIFO Method
1. Equivalent Units of Production
To complete beginning work in process:
Materials: 10,000 units x (100% − 100%) .....
Conversion: 10,000 units x (100% − 30%) ....
Units started and completed during the period
(170,000 units started − 20,000 units in ending inventory) ...............................................
Ending work in process:
Materials: 20,000 units x 100% complete ......
Conversion: 20,000 units x 40% complete .....
Equivalent units of production ...........................
2. Cost per Equivalent Unit
Cost added during the period (a) ..............
Equivalent units of production (b) .............
Cost per equivalent unit (a) ÷ (b) .............
Materials Conversion
0
150,000
20,000
170,000
7,000
150,000
8,000
165,000
Materials Conversion
$139,400
170,000
$0.82
$244,200
165,000
$1.48
3. See the next page.
4. Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory
($8,500 + $4,900) .............................................
Costs added to production during the period
($139,400 + $244,200) ......................................
Total cost to be accounted for ................................
Costs accounted for as follows:
Cost of ending work in process inventory ................
Costs of units transferred out .................................
Total cost accounted for ........................................
$ 13,400
383,600
$397,000
$ 28,240
368,760
$397,000
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Solutions Manual, Chapter 4
175
Problem 4-22 (45 minutes)
3. Costs of Ending Work in Process Inventory and Units Transferred Out
Materials Conversion
Ending work in process inventory:
Equivalent units of production ................................................. 170,000
Cost per equivalent unit ..........................................................
$0.82
Cost of ending work in process inventory ................................. $139,400
Units transferred out:
Cost in beginning work in process inventory ............................
$8,500
Cost to complete the units in beginning work in process inventory:
Equivalent units of production required to complete the beginning inventory ............................................................
0
Cost per equivalent unit .....................................................
$0.82
Cost to complete the units in beginning inventory ................
$0
Cost of units started and completed this period:
Units started and completed this period .............................. 150,000
Cost per equivalent unit .....................................................
$0.82
Cost of units started and completed this period ................... $123,000
Cost of units transferred out ...................................................
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176
Managerial Accounting, 12th Edition
Total
165,000
$1.48
$244,200 $383,600
$4,900
$13,400
7,000
$1.48
$10,360
$10,360
150,000
$1.48
$222,000 $345,000
$368,760
Problem 4-23 (45 minutes)
Housekeeping
Services
Variable costs .............................. $
0 $193,860 $158,840
Food Services allocation:
$2.70 per meal × 800 meals ......
$2.70 per meal × 2,000 meals ...
$2.70 per meal × 1,000 meals ...
$2.70 per meal × 68,000 meals .
Admin. Services allocation:
$3.50 per file × 14,000 files ......
$3.50 per file × 7,000 files ........
$3.50 per file × 25,000 files ......
Total variable costs ...................... $
Food
Services
Administrative
General
Services Laboratory Radiology Hospital
(2,160)
(5,400)
(2,700)
(183,600)
0
$
2,160
$243,600
5,400
(49,000)
49,000
(24,500)
(87,500)
0 $
0 $298,000
$304,800 $ 74,500
2,700
183,600
24,500
87,500
$332,000 $345,600
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Solutions Manual, Chapter 4
177
Problem 4-23 (continued)
Housekeeping
Services
Fixed costs .................................. $87,000
Food
Services
$107,200
Housekeeping Services allocation
@ $0.60 per square foot:
$0.60 × 13,000 square feet .......
(7,800)
$0.60 × 6,500 square feet ......... (3,900)
$0.60 × 10,000 square feet ....... (6,000)
$0.60 × 7,500 square feet ......... (4,500)
$0.60 × 108,000 square feet ..... (64,800)
Food Services allocation:
0.8% × $115,000 ...................
2.4% × $115,000 ...................
1.6% × $115,000 ...................
95.2% × $115,000 ...................
Administrative
General
Services Laboratory Radiology Hospital
$90,180
7,800
3,900
(920)
(2,760)
(1,840)
(109,480)
Admin. Services allocation:
30% × $95,000 .......................
20% × $95,000 .......................
50% × $95,000 .......................
920
(28,500)
(19,000)
(47,500)
$162,300
$215,700 $401,300
6,000
2,760
28,500
4,500
1,840
19,000
64,800
109,480
47,500
Total fixed costs .......................... $
0
$
0
$
0
$199,560
$241,040 $623,080
Total overhead costs .................... $
0
$
0
$
0
$497,560
$573,040 $968,680
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178
Managerial Accounting, 12th Edition
Problem 4-23 (continued)
Computation of allocation rates:
Variable Food Services:
Allocation rate=
=
Variable food services costs
Meals served
$193,860
71,800 meals
=$2.70 per meal
Variable Administrative Services:
Allocation rate=
=
Variable administrative services costs
Files processed
$158,840 + $2,160
46,000 files
=$3.50 per file
Fixed Housekeeping Services:
Allocation rate=
=
Fixed housekeeping services costs
Square feet
$87,000
150,000 square feet - 5,000 square feet
=$0.60 per square foot
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Solutions Manual, Chapter 4
179
Problem 4-24 (30 minutes)
Weighted-Average Method
1. The equivalent units were:
Transferred to next department..................
Ending work in process:
Materials: 40,000 units x 75% complete ...
Conversion: 40,000 units x 60% complete
Equivalent units of production ....................
2. The costs per equivalent unit were:
Cost of beginning work in process ................
Cost added during the period .......................
Total cost (a) ..............................................
Equivalent units of production (b) ................
Cost per equivalent unit, (a) ÷ (b) ...............
Materials Conversion
190,000
30,000
220,000
190,000
24,000
214,000
Materials Conversion
$67,800
579,000
$646,800
220,000
$2.94
3. Total units transferred to the next department ...
Less units in the May 1 inventory ......................
Units started and completed in May...................
$30,200
248,000
$278,200
214,000
$1.30
30,000
5,000
25,000
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Managerial Accounting, 12th Edition
Problem 4-24 (continued)
4. No, the manager should not be rewarded for good cost control. The
Mixing Department’s low unit cost for April occurred because the costs
of the prior month have been averaged in with April’s costs. This is a
major criticism of the weighted-average method in that the costs computed for product costing purposes can’t be used to evaluate cost control or to measure performance for the current period.
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Solutions Manual, Chapter 4
Problem 4-25 (45 minutes)
Weighted-Average Method
1. Equivalent Units of Production
Materials
Transferred to next department* ...................... 170,000
Ending work in process:
Materials: 15,000 pounds x 100% complete ... 15,000
Labor & Overhead: 15,000 pounds x 2/3 complete ..........................................................
Equivalent units of production .......................... 185,000
*18,000 + 167,000 – 15,000 = 170,000.
2. Cost per Equivalent Unit
Materials
Cost of beginning work in process ................
Cost added during the period .......................
Total cost (a) ..............................................
Equivalent units of production (b) ................
Cost per equivalent unit, (a) ÷ (b) ...............
$ 14,600
133,400
$148,000
185,000
$0.80
Labor &
Overhead
170,000
10,000
180,000
Labor &
Overhead
$ 7,200
226,800
$234,000
180,000
$1.30
3. Cost of Ending Work in Process Inventory and Units Transferred Out
Materials Conversion
Ending work in process inventory:
Equivalent units of production
(see above) .......................
15,000
Cost per equivalent unit .......
$0.80
Cost of ending work in process
inventory ...........................
$12,000
Units completed and transferred out:
Units transferred to the next
department .......................
170,000
Cost per equivalent unit .......
$0.80
Cost of units completed and
transferred out...................
$136,000
Total
10,000
$1.30
$13,000
$25,000
170,000
$1.30
$221,000
$357,000
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Managerial Accounting, 12th Edition
Problem 4-25 (continued)
4. In computing unit costs, the weighted-average method mixes costs of
the prior period with current period costs. Thus, under the weightedaverage method, unit costs are influenced to some extent by what happened in a prior period. This problem becomes particularly significant
when attempting to measure performance in the current period. Good
(or bad) cost control in the current period might be concealed by the
costs that have been brought forward in the beginning inventory.
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Solutions Manual, Chapter 4
183
Problem 4-26 (60 minutes)
Weighted-Average Method
1. The equivalent units are:
Units completed during the year .....................
Work in process, Dec. 31:
Materials: 300,000 units × 100% complete ..
Labor: 300,000 units × 50% complete .........
Overhead: 300,000 units × 50% complete ...
Equivalent units of production ........................
Materials
900,000
300,000
Labor
900,000
150,000
Overhead
900,000
1,200,000
1,050,000
150,000
1,050,000
Materials
Labor
Overhead
The costs per equivalent unit are:
Work in process, Jan. 1..................................
Cost added during the year ............................
Total cost (a) ................................................
Equivalent units of production (b)...................
Cost per equivalent unit (a) ÷ (b) ...................
$ 200,000 $ 315,000 $ 189,000 *
1,300,000 1,995,000 1,197,000 **
$1,500,000 $2,310,000 $1,386,000
1,200,000 1,050,000 1,050,000
$1.25
$2.20
$1.32
* 60% × $315,000 = $189,000
** 60% × $1,995,000 = $1,197,000
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184
Managerial Accounting, 12th Edition
Problem 4-26 (continued)
2. The amount of cost that should be assigned to the ending inventories is:
Ending work in process inventory:
Equivalent units of production
(see above) .......................
Cost per equivalent unit .......
Cost of ending work in process
inventory ...........................
Finished goods inventory:
Equivalent units ...................
Cost per equivalent unit .......
Cost of units completed and
transferred out...................
Materials
Labor
Overhead
300,000
$1.25
150,000
$2.20
150,000
$1.32
$375,000
$330,000
$198,000
200,000
$1.25
200,000
$2.20
200,000
$1.32
$250,000
$440,000
$264,000
Total
$903,000
$954,000
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Solutions Manual, Chapter 4
185
Problem 4-26 (continued)
3. The necessary adjustments would be:
Work in
Process
Finished
Goods
Total
Total cost that should be assigned
to inventories (see above) ............................................
$903,000 $954,000 $1,857,000
Year-end balances in the accounts ..................................
660,960 1,009,800 1,670,760
Error..............................................................................
$242,040 $(55,800) $186,240
Work in Process Inventory ..............................................
242,040
Finished Goods Inventory .......................................... 55,800
Cost of Goods Sold ....................................................186,240
4. The cost of goods sold can be determined as follows:
Beginning finished goods inventory..................................
0
Units completed during the year ......................................
900,000
Units available for sale ....................................................
900,000
Less units in ending finished goods inventory ...................
200,000
Units sold during the year ...............................................
700,000
Cost per whole unit ($1.25 + $2.20 + $1.32) ...................
× $4.77
Cost of goods sold ..........................................................
$3,339,000
Alternative computation:
Total manufacturing cost incurred:
Materials (part 1. above) ..............................................
$1,500,000
Labor (part 1. above) ...................................................
2,310,000
Overhead (part 1. above) .............................................
1,386,000
Total manufacturing cost ................................................
5,196,000
Less cost assigned to inventories (part 3. above)..............
1,857,000
Cost of goods sold ..........................................................
$3,339,000
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186
Managerial Accounting, 12th Edition
Problem 4-27 (90 minutes)
Weighted-Average Method
1. a. Work in Process—Refining Department............................
495,000
Work in Process—Blending Department ...........................
115,000
Raw Materials ...........................................................
610,000
b. Work in Process—Refining Department............................
72,000
Work in Process—Blending Department ...........................
18,000
Salaries and Wages Payable ......................................
90,000
c. Manufacturing Overhead ................................................
225,000
Accounts Payable ......................................................
225,000
d. Work in Process—Refining Department............................
181,000
Manufacturing Overhead ...........................................
181,000
d. Work in Process—Blending Department ...........................
42,000
Manufacturing Overhead ...........................................
42,000
e. Work in Process—Blending Department ...........................
740,000
Work in Process—Refining Department ......................
740,000
f. Finished Goods ..............................................................
950,000
Work in Process—Blending Department ......................
950,000
g. Accounts Receivable .......................................................
1,500,000
Sales ........................................................................ 1,500,000
Cost of Goods Sold .........................................................
900,000
Finished Goods .........................................................
900,000
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Solutions Manual, Chapter 4
187
Problem 4-27 (continued)
2.
(g)
Accounts Receivable
1,500,000
Bal.
Bal.
Raw Materials
618,000 (a)
610,000
8,000
Bal.
(a)
(b)
(d)
(e)
Bal.
Work in Process
Blending Department
65,000 (f)
950,000
115,000
18,000
42,000
740,000
30,000
Bal.
(a)
(b)
(d)
Bal.
Work in Process
Refining Department
38,000 (e)
740,000
495,000
72,000
181,000
46,000
Bal.
(f)
Bal.
Finished Goods
20,000 (g)
900,000
950,000
70,000
Manufacturing Overhead
(c)
225,000 (d)
223,000
Bal.
2,000
Accounts Payable
(c)
225,000
Salaries and Wages Payable
(b)
90,000
Sales
(g)
1,500,000
(g)
Cost of Goods Sold
900,000
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Managerial Accounting, 12th Edition
Case 4-28 (90 minutes)
 This case is difficult—particularly part 3, which requires analytical skills.
 Since there are no beginning inventories, it makes no difference whether the weighted-average or FIFO method is used by the company. You
may choose to assign the problem specifying that the FIFO method be
used rather than the weighted-average method.
1. The computation of the cost of goods sold follows:
Transferred
In
Conversion
Transferred
In
Conversion
Units completed and sold ...............................................
200,000
200,000
Work in process, ending:
Transferred in,
10,000 units × 100% ..................................................
10,000
Conversion,
10,000 units × 30% ....................................................
3,000
Equivalent units of production ........................................
210,000
203,000
Cost to be accounted for:
Work in process ..........................................................
0
0
Cost added during the month .......................................
$39,375,000 $20,807,500
Total cost to be accounted for
(a) .............................................................................
$39,375,000 $20,807,500
Equivalent units (above) (b) ...........................................
210,000
203,000
Cost per equivalent unit, (a) ÷
(b) .............................................................................
$187.50 +
$102.50
Whole Unit
= $290.00
Cost of goods sold = 200,000 units × $290 per unit = $58,000,000
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Solutions Manual, Chapter 4
189
Case 4-28 (continued)
2. The estimate of the percentage completion of ending work in process
inventories affects the unit costs of finished goods and therefore of the
cost of goods sold. Gary Stevens would like the estimated percentage
completion figures to be increased for the ending work in process. The
higher the percentage of completion of ending work in process, the
higher the equivalent units for the period and the lower the unit costs.
3. Increasing the percentage of completion can increase net operating income by reducing the cost of goods sold. To increase net operating income by $200,000, the cost of goods sold would have to be decreased
by $200,000 from $58,000,000 down to $57,800,000.
The percentage of completion, X, affects the cost of goods sold by its
effect on the unit cost, which can be determined as follows:
Unit cost = $187.50 +
$20,807,500
200,000+10,000X
And the cost of goods sold can be computed as follows:
Cost of goods sold = 200,000 × Unit cost
Since cost of goods sold must be reduced down to $57,800,000, the unit
cost must be $289.00 ($57,800,000 ÷ 200,000 units). Thus, the required percentage completion, X, to obtain the $200,000 reduction in
cost of goods sold can be found by solving the following equation:
$187.50 +
$20,807,500
= $289.00
200,000 + 10,000X
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Managerial Accounting, 12th Edition
Case 4-28 (continued)
$20,807,500
= $289.00 - $187.50
200,000 + 10,000X
$20,807,500
= $101.50
200,000 + 10,000X
200,000 + 10,000X
1
=
$20,807,500
$101.50
200,000 + 10,000X =
$20,807,500
$101.50
200,000 + 10,000X = 205,000
10,000X = 205,000 - 200,000
10,000X = 5,000
X=
5,000
= 50%
10,000
Thus, changing the percentage completion to 50% will decrease cost
of goods sold and increase net operating income by $200,000 as verified
on the next page.
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Solutions Manual, Chapter 4
191
Case 4-28 (continued)
3. (continued)
Transferred In
Computation of the cost of goods sold:
Units completed and sold .............................................
200,000
Ending work in process ................................................
Transferred in, 10,000 units × 100% .........................
10,000
Conversion, 10,000 units × 50% ...............................
Equivalent units of production ......................................
210,000
Transferred In
Cost of beginning work in process...................................0
Cost added during the month .........................................
$39,375,000
Total cost to be accounted for (a) ...................................
$39,375,000
Equivalent units (above) (b) ...........................................
210,000
Cost per equivalent unit, (a) ÷ (b) ..................................
$187.50
Conversion
200,000
5,000
205,000
Conversion
0
$20,807,500
$20,807,500
205,000
+ $101.50
Cost of goods sold = 200,000 units × ($187.50 per unit + $63.75 per unit) = $57,800,000
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Managerial Accounting, 12th Edition
Case 4-28 (continued)
3. (continued)
The following is an alternative approach to solving this problem:
o The additional income needed = $200,000 ÷ 200,000 units = $1 per
unit
o The cost transferred in cannot be changed, so the conversion cost
must be reduced from $102.50 to $101.50 per EU.
o Therefore, the equivalent units for conversion need to be:
$20,807,500 ÷ $101.50 per EU = 205,000 EUs.
o 205,000 EUs – 200,000 units transferred out = 5,000 EU in WIP
o 5,000 EU ÷ 10,000 units in WIP = 50% complete
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Solutions Manual, Chapter 4
193
Case 4-28 (continued)
4. Mary is in a very difficult position. Collaborating with Gary Stevens in
subverting the integrity of the accounting system is unethical by almost
any standard. To put the situation in its starkest light, Stevens is suggesting that the production managers lie to get their bonus. Having said
that, the peer pressure to go along in this situation may be intense. It is
difficult on a personal level to ignore such peer pressure. Moreover,
Mary probably prefers not to risk alienating people she might need to
rely on in the future. On the other hand, Mary should be careful not to
accept at face value Gary Stevens’ assertion that all of the other managers are “doing as much as they can to pull this bonus out of the hat.”
Those who engage in unethical or illegal acts often rationalize their own
behavior by exaggerating the extent to which others engage in the
same kind of behavior. Other managers may actually be very uncomfortable “pulling strings” to make the target profit for the year.
From a broader perspective, if the net profits reported by the managers
in a division cannot be trusted, then the company would be foolish to
base bonuses on the net profit figures. A bonus system based on divisional net profits presupposes the integrity of the accounting system.
However, the company should perhaps reconsider how it determines the
bonus. It is quite common for companies to pay an “all or nothing” bonus contingent on making a particular target. This inevitably creates
powerful incentives to bend the rules when the target has not quite
been attained. It might be better to have a bonus without this “all or
nothing” feature. For example, managers could be paid a bonus of x%
of profits above target profits rather than a bonus that is a preset percentage of their base salary. Under such a policy, the effect of adding
that last dollar of profits that just pushes the divisional net profits over
the target profit will add a few pennies to the manager’s compensation
rather than thousands of dollars. Therefore, the incentives to misstate
the net operating income are reduced. Why tempt people unnecessarily?
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Managerial Accounting, 12th Edition
Case 4-29 (45 minutes)
Weighted-Average Method
1. The revised computations follow:
Equivalent Units of Production
Transferred to next department........................
Ending work in process:
Transferred in: 600 units x 100% complete.....
Materials: 600 units x 0% complete ...............
Conversion: 600 units x 35% complete...........
Equivalent units of production ..........................
Cost of beginning work in process ...................
Cost added during the period ..........................
Total cost (a) .................................................
Equivalent units of production (b) ...................
Cost per equivalent unit, (a) ÷ (b) ..................
Transferred
In
1,800
600
2,400
Transferred
In
$ 4,068
17,940
$22,008
2,400
$9.17
Materials
1,800
0
1,800
Materials
$1,980
6,210
$8,190
1,800
$4.55
Conversion
1,800
210
2,010
Conversion
$ 2,160
13,920
$16,080
2,010
$8.00
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Solutions Manual, Chapter 4
195
Case 4-29 (continued)
Ending work in process inventory:
Equivalent units of production (see above) ..
Cost per equivalent unit .............................
Cost of ending work in process inventory ....
Units completed and transferred out:
Units transferred to the next department.....
Cost per equivalent unit .............................
Cost of units completed and transferred out
Transferred
In
Materials
Conversion
Total
600
$9.17
$5,502
0
$4.55
$0
210
$8.00
$1,680
$7,182
1,800
$9.17
$16,506
1,800
$4.55
$8,190
1,800
$8.00
$14,400
$39,096
2. The unit cost on the report prepared by the accountant is high because none of the cost incurred
during the month was assigned to the units in the ending work in process inventory.
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Managerial Accounting, 12th Edition
Case 4-30 (60 minutes)
FIFO Method
1.
To complete beginning work in process:
Transferred in: 450 units x 0% ......................................
Materials: 450 units x 0% .............................................
Conversion: 450 units x (1 − 60%) ...............................
Units started and completed during the period (1,950 units
started − 600 units in ending inventory)* .......................
Ending work in process:
Transferred in: 600 units x 100% complete
Materials: 600 units x 0% complete ..............................
Conversion: 600 units x 35% complete ..........................
Equivalent units of production ...........................................
Cost added during the period (a) .......................................
Equivalent units of production (b) ......................................
Cost per equivalent unit (a) ÷ (b) ......................................
Transferred In
0
1,350
600
1,950
Transferred In
$17,940
1,950
$9.20
Materials Conversion
0
1,350
0
1,350
180
1,350
210
1,740
Materials Conversion
$6,210
1,350
$4.60
$13,920
1,740
$8.00
* 1,950 units – 600 units = 1,350 units
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Solutions Manual, Chapter 4
197
Case 4-30 (continued)
Ending work in process inventory:
Equivalent units of production ..........................
Cost per equivalent unit ...................................
Cost of ending work in process inventory ..........
Transferred In Materials Conversion
600
$9.20
$5,520
Units transferred out:
Cost in beginning work in process inventory .....
$4,068
Cost to complete units in beginning work in process inventory:
Equivalent units of production required to
complete the beginning inventory (see
above) ....................................................
0
Cost per equivalent unit ..............................
$9.20
Cost to complete units in beginning inventory ...........................................................
$0
Cost of units started and completed this period:
Units started and completed this period .......
1,350
Cost per equivalent unit ..............................
$9.20
Cost of units started and completed this
period .....................................................
$12,420
Cost of units transferred out ............................
Total
0
$4.60
$0
210
$8.00
$1,680
$7,200
$1,980
$2,160
$8,208
0
$4.60
180
$8.00
$0
$1,440
1,350
$4.60
1,350
$8.00
$6,210
$10,800
$1,440
$29,430
$39,078
2. The effects of the cost-cutting will tend to show up more under the FIFO method. The reason is that
the FIFO method keeps the costs of the current period separate from the costs of the prior period.
Thus, under the FIFO method, the company will be able to compare unit costs of the current period
to those of the prior period to see how effective the cost-cutting program has been. Under the
weighted-average method, however, costs carried over from the prior period are averaged in with
costs of the current period, which will tend to mask somewhat the effects of the cost-cutting effort.
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Managerial Accounting, 12th Edition
Case 4-31 (75 minutes)
1. Step method:
Custodial
Personnel Services
Maintenance
Printing
Binding
Total cost before allocations ............................ $360,000 $141,000 $201,000 $525,000 $373,500
Allocations:
Personnel (@ $1,800 per employee)* ............ (360,000)
27,000
45,000
72,000
216,000
Custodial services
(@ $1.20 per square foot)** ......................
(168,000) 24,000
96,000
48,000
Maintenance (5/6, 1/6) .................................
(270,000) 225,000
45,000
Total overhead cost after allocations ................ $
0
$
0 $
0 $918,000 $682,500
Divide by machine-hours .................................
150,000
Divide by direct labor-hours .............................
175,000
Predetermined overhead rate ..........................
$
6.12 $
3.90
* Based on 15 + 25 + 40 + 120 = 200 employees.
** Based on 20,000 + 80,000 + 40,000 = 140,000 square feet.
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Solutions Manual, Chapter 4
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Case 4-31 (continued)
2. Direct method:
Custodial
Personnel Services
Maintenance
Printing
Binding
Total costs before allocations ........................... $360,000 $141,000 $201,000 $525,000 $373,500
Allocations:
Personnel (1/4, 3/4)* ................................... (360,000)
90,000
270,000
Custodial Services (2/3, 1/3)** .....................
(141,000)
94,000
47,000
Maintenance (5/6, 1/6) .................................
(201,000) 167,500
33,500
Total overhead cost after allocations ................ $
0 $
0 $
0 $876,500 $724,000
Divide by machine-hours .................................
150,000
Divide by direct labor-hours .............................
175,000
Predetermined overhead rate ..........................
$
5.84 $
4.14
* Based on 40 + 120 = 160 employees.
** Based on 80,000 + 40,000 = 120,000 square feet.
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Managerial Accounting, 12th Edition
Case 4-31 (continued)
3. a. The amount of overhead cost assigned to the job would be:
Step method:
Printing department:
$6.12 per machine-hour × 15,400 machine-hours ....... $ 94,248
Binding department:
$3.90 per direct labor-hour × 2,000 direct labor-hours
7,800
Total overhead cost ...................................................... $102,048
Direct method:
Printing department:
$5.84 per machine-hour × 15,400 machine-hours ....... $ 89,936
Binding department:
$4.14 per direct labor-hour × 2,000 direct labor-hours
8,280
Total overhead cost ...................................................... $ 98,216
b. The step method provides a better basis for computing predetermined overhead rates than the direct method because it gives recognition to services provided between service departments. If this interdepartmental service is not recognized, then either too much or too
little of a service department’s costs may be allocated to a producing
department. The result will be an inaccuracy in the producing department’s predetermined overhead rate.
For example, using the direct method and ignoring interdepartmental
services causes the predetermined overhead rate in the Printing Department to fall to only $5.84 per MH (from $6.12 per MH when the
step method is used), and causes the predetermined overhead rate in
the Binding Department to rise to $4.14 per DLH (from $3.90 per
DLH when the step method is used). These inaccuracies in the predetermined overhead rate can cause corresponding inaccuracies in bids
for jobs. Since the direct method in this case understates the rate in
the Printing Department and overstates the rate in the Binding Department, it is not surprising that the company tends to bid low on
jobs requiring a lot of printing work and tends to bid too high on jobs
that require a lot of binding work.
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201
Research and Application 4-32 (120 minutes)
1. The processing departments for Anheuser Busch’s brewing process are
listed below in sequential order. The raw material inputs are listed in parentheses next to the department where they are added to the manufacturing process.
 The Mashing Department (ground barley malt, water, and milled rice
are added to production).
 The Straining Department (no raw materials are added).
 The Brew Kettle Department (hops are added to production).
 The Cooling Department (no raw materials are added).
 The Primary Fermentation Department (yeast is added to production).
 The Beechwood Aging Department (beechwood chips are added to
production).
 The Filtering Department (no raw materials are added; brewmasters
perform final quality control check at this point).
 The Filling/Packaging Department (glass bottles or aluminum containers as well as labels are added to production).
 The Shipping Department (cartons are added to production and then
finished goods are shipped)
2. The brewing process consumes fairly large amounts of manufacturing
overhead costs. This should be apparent to students based on the photographs that accompany the on-line tour. There are many pictures of
large pieces of capital equipment that are used to make beer. Very few
employees are shown in the photos contained in the on-line tour, which
suggests that beer making is a capital intensive process. The depreciation costs associated with the equipment as well as the utility and
maintenance costs incurred to run the equipment are three examples of
overhead costs. It is also worth noting that the equipment shown in the
photographs is large in size, thereby suggesting that Anheuser Busch’s
beer-making facilities occupy a large amount of square footage—all of
which needs lighting, heat, insurance, etc. These are additional examples of manufacturing overhead costs
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Managerial Accounting, 12th Edition
Research and Application 4-32 (continued)
3. The T-account model is shown below:
Raw Materials
Wages Payable
Manufacturing Overhead
Work in Process: Mashing
XXX
Work in Process: Straining
XXX
XXX
The T-account model shown above assumes that labor cost is incurred
at each step of the process to operate and maintain the beer-making
equipment. The Shipping Department adds packaging costs in the form
of cartons. We also assume that equipment and labor costs are incurred
to operate the carton packaging equipment. Once the beer has been
packaged into cartons, we continue the flow of costs to finished goods.
4. While the on-line tour does not provide sufficient information to answer
this question, it is reasonable to expect students to speculate that operation costing may be appropriate because each brand of beer uses different ingredients. Furthermore, some brands of beer go through a
slightly different manufacturing process. These attributes of the brewing
process suggest that some material costs and conversion costs may be
assigned to particular batches of production rather than being spread
over the entire volume of production for a given period of time without
regard to the brand of beer being manufactured.
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Solutions Manual, Chapter 4
203
Research and Application 4-32 (continued)
To enrich this discussion, we recommend that you visit www.anheuserbusch.com/overview/abi.html. This web site requires viewers to be 21
years old, so we do not recommend having your students visit this site
directly. Some excerpts from this web site that can be used to demonstrate the applicability of operation costing are as follows:
 “Bud Light is brewed with a malt and hops ratio different from Budweiser.”
 “Michelob is brewed with a superior ingredient blend…using all imported hops and a high percentage of two-row barley malt.”
 For Michelob Honey Lager – “Anheuser-Busch brewmasters combine
two-row and caramel barley malt, a blend of imported and domestic
hops, and a touch of honey to produce a full-bodied, slightly sweet
beer.”
 Michelob Ultra is brewed using the finest pale two-row and six-row
barley, select grains, all-imported hops and a pure cultured yeast
strain. The special choice of grains, combined with an extended mash
process, produces a smooth, refreshing beer with fewer carbohydrates.”
Note to instructors: The requirements for this problem do not ask students to describe Anheuser’ Busch’s strategy. However, if you wish to
broach this subject, Anheuser-Busch provides an interesting example of
how a company tailors its business strategy to market segments. Anheuser-Busch succeeds first and foremost because of a product leadership customer value proposition. However, the company segments its
market into no fewer than three main segments. The Michelob product
family serves the high-priced, premium market segment. The Budweiser
product family serves the mid-priced market segment. The Busch product family serves the low-priced market segment. Within each segment
of the market, Anheuser-Busch strives to maintain a product leadership
position by offering the best tasting beer available given the target price
range. While Anheuser-Busch offers more than three product families
that serve various niche markets, Michelob, Budweiser, and Busch are
its three major brands.
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